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Corporate Transactions – Are You Living in the Past or the Future?

The advent of the new year brought an onslaught of corporate transactions to the team here at SOS. After we caught our breath, we realized that while most people think “merger and acquisition” when they hear the term corporate transaction, the field is actually much wider than just M&A. A corporate transaction is any business transaction to which the company is a party. Corporate transactions can include:

Initial Public Offerings: A type of securities offering in which shares of the company are offered to the general public through a securities exchange for the first time.

Corporate Financings: Gone are the days when financings were limited to private companies and denoted with A, B, C or D designations. Public companies are getting in on the act and raising money through offerings backed by notes and warrants.

Re-capitalizations: This is a re-organization of the company’s capital structure resulting in a substantial change in way in which the company is capitalized. Thanks to Facebook and LinkedIn, by far the biggest trend in recapitalization involves issuing dual class common stock. Dual class stock structures consist of two classes of stock, both of which have different voting rights and dividend payments.

Stock dividends: Dividends are back in a big way! With more shareholders calling for companies to pay out stock piles of cash and the rise of REITs (real estate investment trusts) who have to pay out 90% of their taxable income to shareholders, dealing with dividends is the new normal in most stock administrators’ lives.

Spin offs: Spin offs are a transaction in which a company (usually publicly traded) spins a division off into a separate stand-alone company (usually also publicly traded). A tremendous amount of advanced planning, resources and project management are needed during the process to ensure that the new company can operate as a public company on day one.

Stock splits: A stock split can increase or decrease the number of shares issued in connection with the capitalization of a company. The price of the company shares is adjusted so that the overall market capitalization of the company remains the same and dilution does not occur. Stock split ratios are also applied to outstanding equity instruments including options, restricted stock units and warrants.

Why is SOS involved in corporate transactions? Because these transactions impact equity awards and stock administration.

Flashback to pre-2006, when companies spun, split or merged, they generally adjusted the outstanding equity by either having their equity vendor perform the adjustments or did the math themselves in their fancy spreadsheets. Awards (primarily RSAs back then granted only to the top executives) were adjusted by the transfer agent because the stock administrator simply pulled the stock certificate out of the drawer and mailed to the transfer agent for reissuance. Let’s not forget that in many companies back then few employees had equity, except for ESPP. Expensing of options was not yet a reality either.

Moving ahead several years, post FAS123(R), we learned these adjustments could become more problematic. Many equity platforms could handle the simple adjustment of the shares and prices for the transaction (an adjustment ratio applied to both or maybe a cancel and re-grant function). Finance teams took care of the expensing issues in their own shop and didn’t worry what the equity systems could handle. Often the stock administrator had no idea what was happening behind the scenes in the accounting group. We typically saw the old equity grant being adjusted into the new number of shares/prices or in some cases split into a combination of two if a spin off was taking place and data files being dumped and provided to finance for their expensing work.

Moving into today’s world we find that the finance teams have experienced so much pain behind the scenes and while many equity platforms can handle the adjustment of the shares and prices, they do not necessarily handle the expensing exactly as the transaction may require. When adjusting the equity you need to be sure you are not resetting the expense calculations or causing the system to perform some form of catch up of what it thinks is lost expense. There are the additional challenges in matching the newly adjusted grants to the deferred tax asset balance and tracking participants who may no longer be your employees.

No matter what the era the same old story can be found…the equity team is the last to know and has little time to plan or the resources to manage this work while handling day-to-day activity. Help is always welcomed!

- The SOS Professional Services Team

WooHoo! A Stock Split is Coming...

When participants hear about a stock split, there is usually excitement about what is coming. The stock is doing well, the price is rising, and stockholders are about to increase their holdings. In equity administration we know that many of these feelings are true as long as it is not a reverse stock split. However, we also know that with any stock split there are many moving parts that must be synchronized to be successful and also many pot holes lurking around the corners.

If we have an idea of what those pot holes are, we can attempt to prepare for them. Your grandmother was right when she said an ounce of prevention is worth a pound of cure! So, what are the pot holes out there that you should be aware of? Potential potholes are: planning and creating communications, the timing of the split, auditing your equity data, preparing for the actual split, and performing the split in your equity administration system. Not all of these items will come into play in every stock split, but they could.

The first thing to think about is communications with your participants and any vendor(s) that may be involved. Many companies work to prepare special pre/post types of reports to send to their participants. These reports help explain what equity the participant held before the split and what they hold after the split. The statements also help to eliminate many of the inquiries that light up the equity administrator’s phone or fill their inbox after this type of corporate transaction. Additionally, don’t forget to discuss the pending split with any outside vendors, like brokers, transfer agents and equity platform providers. Take the time to schedule a call to discuss the details of the pending split with them and in exchange your vendors can provide any insight into their necessary processes or tips/issues they may be aware of regarding their part of the split process. Your vendor may also be able to post communications online about your split that your participants are able to see when they access their platform.

As with any corporate transaction, it is important to try to get as much information as you can regarding the timing of the split. Often other departments may not be aware of all the tasks impacted by the split, such as quarter end and year end reporting, upcoming releases or employee stock purchase plan purchase dates. Working to educate other departments involved about the processes in equity administration and the times of peak activity will not only help when a stock split happens, but also other corporate actions, such as a merger or acquisition.

Another area that can dramatically help or hinder the processing of the split relates to the equity data itself. You should perform an audit to verify all the data in your equity system is as accurate and as up to date as possible. Remember that a stock split will typically impact all the equity data in your system and finding an issue after the fact can be very difficult and time consuming to resolve. You may have to “unwind” the split, fix the issue, and then re-process/re-audit the split. Who has the time to do that?

What items should you audit? It is important not only review your equity data, but also your demographic/participant data. The specific data to review can vary based on your communication plans and other factors, but some special items to review are:

New hires that may receive equity prior to the split: Are they receiving their grant paperwork in pre or post split numbers? Will it match their offer letter?

Email addresses for all participants: If you are sending email communications or statements, it is vital to have correct email addresses for at least the current participants, if not all participants.

Physical addresses for participants: If you are going to mail communications or statements, perhaps to former employees, contact Human Resources for the latest data on employee home addresses.

Any pending terminations that may happen prior to the split date.

From an equity perspective make sure all the following are up to date in your stock administration system as of the record date of the split: all new grants, exercises, releases/vestings, cancellations not related to a termination, repurchases, employee stock purchases and dividends. These all can impact the split if missing or incorrect and will cause significant time to fix.

Once the pending data is loaded into your equity administration system, it is important to perform a test split. Most vendors can create a test environment with your production database, to enable you to perform the split and review the results, prior to performing then in production. Prior to performing your test split, you should run several reports to help validate that the equity platform is processing the split as you expect. Most systems provide tools for you to extract grant and transaction information into a spreadsheet, so that you can perform some of your own calculations and audit the results. Be aware, equity administration systems handle the rounding of uneven shares differently. Make sure the settings are aligned with the treatment of shares dictated by the terms of the split. This is a main area to focus on during your test and may require that you run an additional tests to ensure you select the correct rounding options.

For example, you have an original grant for 1000 shares, with 247 shares exercised, no shares cancelled, and 753 shares still outstanding. Your split ratio is 2.567. Without adjusting for fractions, this would result in 2567 shares granted, 634.049 exercised and 1932.951 shares outstanding.

Some equity administration systems will drop the fractions and leave you with 2567 granted, 634 exercised and 1932 outstanding. But this will leave your grant out of balance, since the granted minus the exercised minus the cancelled would be 2567-634-0=1933.

In cases like this there are different ways that you can solve the out of balance issue. It is important to know if you will have this issue and then determine the process to correct this scenario before you start processing the split in the production database, when time can be limited. For example, if the intent of your split is to apply the ratio to the outstanding and round down to the nearest whole share, then you would need to increase the exercised bucket to reflect 635 shares exercised and the outstanding to be 1932. You may need your equity administration system vendor to help with these fixes.

Auditing the final data post-split is an important part of the process. Some equity administration systems provide a post-split data report or other audit reports to help you find such issues. Comparing the outstanding shares and prices by grant to the manual application of the split ratio to the data you extracted earlier will help you find any such differences. Always double check by running reports containing granted, exercised, cancelled and outstanding shares, as well as the grant price. Also remember to check that the numbers add up. Ensure that the granted minus exercised minus cancelled equals the outstanding and ensure that the results are as you expect from your manual exercise.

Running through this test process will not only verify the equity administration systems results, but will also alert you to any limitations in the equity administration system, such as a limit to the number of decimal places in your conversion ratio. If you conversion ratio has 6 decimal places, but your equity administration system only allows three decimals, is there a work-around the vendor can give you prior to testing the split? Finally, not only will these tests provide insight into what your equity administration system will do, but they will also help you understand the processing time and necessary steps to perform and audit the split.

Once you verify the data in the equity administration system, you should also perform a shares outstanding reconciliation with your transfer agent. Remember, the shares outstanding will have changed not only because of your participants but because the external shareholders are also impacted by your split.

If this reconciliation is off, double check your information, but keep in mind your broker(s) and transfer agent are also involved in the split process. We have seen issues where the post-split shares outstanding reconciliation did not tie and none of the parties involved could find an error on the company’s side. A year later, one of the brokers realized they had requested fewer shares than they should have, and the mystery was solved.

So, remember that a stock split can be very exciting to the shareholders, but as an equity administrator, there are many steps and challenges along the way. If you do your homework and prepare for the pending action, you should minimize the challenges, when it comes time to deliver on all that excitement.

Product Spotlight: Mergers & Acquisitions

SOS provides extensive product management, stategic guidance, and onsite assistance with the flurry of stock plan activity surrounding a merger or acquisition. Below are the ways we work with our clients in this area:

General Management and Other Key Areas of Assistance

Provide overall management of the Merger & Acquisition for the Stock Plan Administrator

Guidance on the execution while staying in compliance with the transaction terms

Provide guidance on the communication to and the treatment of employees (retention concerns and payouts, severance treatment, acceleration triggers, special agreements, tax impact, reporting obligations, etc.)

Assist in identifying whether or not the treatment of any ISO will result in a modification

Provide general understanding around the accounting consequences as a result of the transaction

International Assistance

Generate country-specific communications for events related to Merger & Acquisition transactions (exchange or cash out of equity awards, explanation of awards for new employees of acquired foreign entities

Pinpoint issues and questions for more detailed review with global tax and regulatory specialists

Deliverables can include: hard-copy FAQs and/or webinars, and written report of issues for in-depth review prior to transaction

Register for our first Aspirations Fling on 4.27.16 in Santa Clara, California. Earn CEP & CPE credit in this quick, three hour breakfast meeting for executives and stock plan staff from private companies preparing their stock plans for an IPO, rapid growth or liquidity event.

Consultant Corner: SEC Reporting Primer for Post-IPO Companies

So the party is over and your company is public! Ditch that party hat and get to work! Oh, wait, that’s not a party hat. You are the stock plan administrator and that’s your IPO-prep hat. Welcome to the world of post-IPO reporting – that’s a whole different hat.

As the stock plan administrator, you are a key player in the company’s extensive SEC reporting requirements. The finance department relies heavily on you for information required in financial reports. The Compensation Committee relies on you to ensure the equity compensation database accurately reflects individual and group award statistics, including goals and objectives for executive compensation. The Audit Committee wisely asks for your input in designing policies and procedures for the equity award issuance and transaction processing. Investor Relations may rely on you to assist with posting SEC filings to the company’s website. And the Compliance Officer relies on you for information included in Section 16 reporting. And, of course, if you’re with a smaller company, you may be the stock plan administrator, Investor Relations and Compliance Officer all rolled into one. So many hats!

If you are with a smaller reporting company or one that qualifies as an Emerging Growth Company under the Jumpstart Our Business Startups Act of 2012 (JOBS Act) (newly public companies that have total annual gross revenues of less than $1 billion), reporting is reduced, but only a little.

Some reports are filed annual or quarterly, based on the company’s fiscal year end. Some reports are event-based. The SEC requires posting of periodic and current reports, Section 16 reports and other information on the company’s website. The company can accomplish this by posting a hyperlink to the EDGAR database on the SEC’s website.

Here is a list of the company’s key reporting obligations and what the stock plan administrator should know. As always, be sure to consult with legal counsel and the auditors regarding the company’s SEC filings:

Know Your Filing Status!

Large Accelerated Filer: Seasoned filer. Has public float of $700 million or more as of the end of the company’s most recently completed second fiscal quarter.

Accelerated Filer: Has public float of $75 million or more but less than $700 million.

Non-Accelerated Filer or Smaller Reporting Company: Not a Large Accelerated Filer nor an Accelerated Filer, has public float of less than $75 million and meets a host of other requirements. Usually new IPO companies start out in one of these categories for the first 12 months.

Xtra Note: These filing statuses require precise calculations of the company’s public float and are very important as they govern the SEC filing deadline dates for the company’s Form 10-K and Form 10-Q as discussed below.

Form 10-K (annual report) – first filed within 90 days after end of the company’s fiscal year. In addition to financial and company information, the Form 10-K includes extensive aggregated reporting on equity issuances and executive holdings, with separate categories for plans that have received shareholder approval and plans that have not. Tabular reporting is reduced for smaller reporters and Emerging Growth Companies. As a company’s public float increases following the IPO, the Form 10-K is required to be filed in a shorter time period. The deadline could be as early as 60 days for Large Accelerated Filers to 75 days for Accelerated Filers after the company’s fiscal year end.

Form 10-Q (quarterly report) – first filed within 45 days after the end of each first three fiscal quarters each year and provides updated 10-K information. Similar to above, as a company’s public float increases, the Form 10-Q is required to be filed as early as 40 days after the company’s fiscal quarter end.

Form 8-K (significant nonrecurring events) – filed within 4 business days of a triggering event. Includes equity awards to new officers, to new directors elected outside of an annual or special meeting of shareholders, or new material plans or arrangements with principal executive officer/financial officer or named executive officer (if the terms are inconsistent with previously disclosed plans/arrangements or if the plan/arrangement is not available to all salaried employees).

Proxy Statement (annual report to shareholders) – usually filed no later than 120 days following the company’s fiscal year end and delivered to shareholders prior to an annual or special meeting of shareholders.

Schedule TO Tender Offer Statement – filed when the company plans to implement an option exchange. Includes an analysis of the effect of the exchange on the company’s financial statements and dilution to existing shareholders.

Section 16 Reports. These are reports that must be filed by Section 16 reporting persons, but stock plan administrators are often asked to prepare these filings. The Compliance Officer should monitor the reporting person’s trading and filings. The Compliance Officer is responsible for tracking the timing of these trades for Section 16(b) short-swing profits recovery purposes.

Form 3 – company equity holdings of persons newly subject to Section 16 reporting. File within 10 days of becoming subject to reporting.

Form 5 – Section 16 person’s exempt transaction and delinquent reporting. File within 45 days of fiscal year end.

Companies must post their Section 16 reports (Forms 3, 4 and 5, including all exhibits and attachments) by the end of the business day after the date the report is filed with the SEC. If a company posts via hyperlink, it must post a separate, direct link to the Section 16 filing only.

Achaessa James
Equity Compensation Consultant
Stock & Option Solutions, Inc.ajames@sos-team.com
Achaessa James has been an Equity Compensation Consultant for Stock & Option Solutions, Inc. (SOS) since 2013, assisting clients with data migrations, capitalization & issuance audits, and strategic implementation solutions for leading edge equity programs. She obtained her CEP in 2008 and has managed the National Center for Employee Ownership's industry-recognized Certified Equity Professional Exam Prep Course since 2011. She is a blogger and published author on private company equity compensation issues.

Brand Awareness: Building Your Professional Brand

Excel Tips on Repeatable Processes

Apr 26, 2016 11:00 AM PDT

Brands from Nike to Facebook have claimed a space in the consciousness of individuals around the globe; so, why can't you? Now more than ever, professionals are expected to be known for something in our industry. No longer is it enough to merely do a great job. The age of social media has increased connectivity and visibility in a way that has changed how we do business for good. Professionals seeking advancement in their careers are now required to demonstrate their expertise and manage their reputation in the office and online.

Our experts will share with you the importance of building a professional brand, how to identify and cultivate your personal brand, steps to develop your brand mantra, tips for creating an online presence, and how to build your professional network.

(One hour of Certified Equity Professional continuing education credit is available for attending. See the CEPI website for more information on CEP continuing education requirements.)

SOS Xposé

...tender tidbits about people and players in our industry...

Smiling from ear to ear... Raul Fajardo is now at Certent as the Level 3 Customer Support Manager. Joe Thatcher is a Relationship Manager for AST Equity Plan Solutions. Ben Needham, CEP, begins working as Senior Equity Administrator at MINDBODY at the end of this month.

Bouncing babies... Eddie Chen of Illumina and his wife, Lisa welcomed their second child on January 24, 2016. This time it’s a boy!

Endless love... Andy Brown of Juniper Networks married his long time sweetheart, Mary, in San Francisco on November 23rd, 2015. See the pic!

Going to be spoiled rotten... Clay Jones of SOS recently became a Great Grand Dad to a precious baby girl, Vayda Malysa. Tim Quist, also of SOS, and his wife Beth have a new happy and healthy grandson, Isaac Nicholas Harrington, born on February 21, 2016. Isaac weighed 7 lbs 5 oz and was 20 inches long.

Back in the swing of things... After a relaxing dip in the retirement pool, Nancy Dartez is back by popular demand with Vital Therapies as the Senior Manager, Equity & Finance.

Decorating the nursery with trains and planes... Alicia Perusse of Square and her husband, Brendan, are expecting their first baby in May and it’s a boy!

Soaking up the sun... Cheryl Spielman retired from Ernst & Young in December 2015 and has since moved to Florida to enjoy some sun and sports. Cheryl is a member of the Board of a NY technology company IPM and doing transformational consulting in the HR and Tax space as an independent consultant.

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Information provided in this newsletter is designed for educational and entertainment purposes only and is not provided as professional service or advice. Moreover, this newsletter should not be relied on as legal, accounting, auditing, or tax advice. Anyone reading this newsletter should not act upon this information without seeking professional counsel and/or input from their advisors. The preceding information does not necessarily represent the official views of Stock & Option Solutions, Inc. with respect to any of the issues addressed.